Bonds often pay a coupon twice a year. For the valuation ofbonds that make semiannual payments, the number of periods doubles,whereas the amount of cash flow decreases by half. Using the valuesof cash flows and number of periods, the valuation model isadjusted accordingly.
Assume that a $1,000,000 par value, semiannual coupon USTreasury note with four years to maturity has a coupon rate of 4%.The yield to maturity (YTM) of the bond is 7.70%. Using thisinformation and ignoring the other costs involved, calculate thevalue of the Treasury note:
a) $1,049,602.92
b) $874,669.10
c) $551,041.53
d) $743,468.74
Based on your calculations and understanding of semiannualcoupon bonds, complete the following statement:
When valuing a semiannual coupon bond, the time periodvariable(N) used to calculate the price of a bond reflects thenumber of periods remaining in the bond’s life.
